alcohlic brevrage dec2012
TRANSCRIPT
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Alcoholic Beverages
3 December 2012
Update | Sector: Consumer
Cheers!Cheers!Gautam Duggad ([email protected]) + 91 22 3982 5404
Sreekanth P.V.S. ([email protected]) +91 22 3029 5120
Gautam Duggad ([email protected]) + 91 22 3982 5404
Sreekanth P.V.S. ([email protected]) +91 22 3029 5120
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Consumer | Alcoholic Beverages
Consumer | Alcoholic Beverages: Cheers!
Page No.
Summary .............................................................................................................................. 3
UNSP-Diageo deal can change dynamics of IMFL industry ....................................... 4-11
India an attractive market for spirits ..............................................................................12
Diageo in India: Strong in international spirits segment ......................................... 13-16
United Spirits: The party has just begun ................................................................... 17-26
Radico Khaitan: Premiumization strategy working ................................................. 27-32
Tilaknagar Industries: Emerging player ..................................................................... 33-34
Annexure 1: Key drivers of IMFL demand ................................................................. 35-36
Annexure 2: Spirits - sales mix to gradually shift in favor of IMFL .......................... 37-38
Annexure 3: Key segments of IMFL industry ............................................................. 39-42
Annexure 4: High entry barriers to work in favor of existing players ..........................43
Annexure 5: Distribution system - gradually tilting in industry's favor ................. 44-45
Annexure 6: Complex taxation/duty regime .................................................................. 46
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Alcoholic BeveragesCheers! Improving outlook as MNCs gain control
Reiterate Buy on United Spirits and Radico Khaitan
The recent agreement under which Diageo has acquired ~28% in United Spirits (UNSP)
will result in Diageo gaining management control of India's largest spirits company.
Over 50% of the IMFL market will be controlled by MNCs, which should result in greater
transparency, operational discipline and more efficient deployment of resources.
IMFL stocks have run up considerably post the deal announcement. We expect the re-
rating to sustain, given the potential sector-wide benefits following the deal.
We recommend Buy on United Spirits and Radico Khaitan and upgrade our target prices.
We introduce Tilaknagar Industries (Not Rated).
UNSP-Diageo deal can change dynamics of IMFL industry
The UNSP-Diageo deal will result in Diageo gaining management control of UNSP.
Given Diageo's focus on the premium/super-premium segments, the industry trend
towards premiumization will be further boosted. Post the deal, over 50% of the
IMFL market will be controlled by MNCs. This should result in greater transparency,
operational discipline and more efficient deployment of resources. With the shift
in competitive landscape, we expect advertising spends and brand investments to
go up considerably. Also, the passage of management control of the industry leader
to a foreign company could pave the way for lower import duties.
United Spirits: The party has just begun
Post the deal , United Spirits (UNSP) stock has been re-rated on the back of expectedbalance sheet improvements following management control by Diageo. Though
the IMFL sector offers an attractive long-term opportunity, there are also challenges
pertaining to regulations, duties/taxes, and ban on advertising, none of which will
change immediately. The benefits will, therefore, be back-ended. Nonetheless,
we expect the stock re-rating to sustain - a precedent exists in the deal between
Heineken and United Breweries (UBBL). We reiterate Buy, with a revised target
price of INR2,490.
Radico Khaitan: Premiumization strategy workingRadico Khaitan (RDCK) has demonstrated its ability to drive premiumization - the
salience of premium brands has risen from 8% of total volumes in FY09 to 16% in1HFY13. Also, the IMFL pricing environment is turning favorable, which should enable
margin expansion. We expect RDCK to deliver strong 23% earnings CAGR over FY12-
15, led by 230bp margin improvement. The stock has appreciated ~25% since our
initiation on 31 October 2012 and subsequent announcement of the Diageo-UNSP
deal. We reiterate Buy, with a revised price target of INR181 - 24% upside.
Tilaknagar Industries: Emerging playerTilaknagar Industries' (TLNGR) robust financial performance in the last five years
highlights its ability to capitalize on the rapidly premiumizing IMFL industry. Its
strength in South India and manufacturing network makes it an attractive partner
for foreign liquor companies. It has announced a strategic bottling agreement with
Pernod Ricard India. The stock trades at 13.6x FY13E and 10x FY14E earnings
(Bloomberg consensus). Not Rated.
Investors are advised to refer
through disclosures made at the
end of the Research Report.
3 December 2012
Update | Sector: Consumer
3 December 2012 3
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UNSP-Diageo deal can change dynamics of IMFL industryTo hasten premiumization; brand investments to accelerate
The recent agreement under which Diageo has acquired ~28% in UNSP will result in
Diageo gaining management control of India's largest spirits company.
Given Diageo's unwavering focus on the premium/super-premium segments, the growing
industry trend towards premiumization would be further boosted.
With the resultant shift in competitive landscape, we expect industry advertising spends
as well as brand investments to go up considerably.
The passage of management control of the industry leader to a foreign company could
also pave the way for easing of import duties in future, in our view.
Diageo to gain management control of UNSP
Diageo Plc, United Breweries Holdings (UB) and United Spirits (UNSP) announced
agreements under which Diageo will acquire 27.4% stake in UNSP. Post this, Diageowill launch a mandatory tender offer (open offer), at a price of INR1,440/share.
However, post the announcement of the deal, UNSP shares have rallied significantly
and have crossed the open offer price. If Diageo's open offer is fully subscribed, it
would eventually own 53.4% of UNSP at a total consideration of INR111.7b. While its
gaining majority shareholding in UNSP now appears difficult, Diageo has secured
board/management rights as part of the deal conditionalities.
Details of the deal
Diageo will acquire 19.3% interest in UNSP's current share capital at a price of
INR1,440/share from the UB group, the UNSP Benefit Trust, two subsidiaries ofUNSP - Palmer Investment Group and UB Sports Management, and the SWEW
Benefit Trust.
Of the 19.3%, 12.8% will come from UB, which post the stake sale will own 14.9%
of UNSP's current share capital. The balance 6.5% will come from treasury shares
- UNSP Benefit Trust, two subsidiaries of UNSP and SWEW Benefit Trust.
UNSP will also make a preferential allotment of 10% of the post-issue capital base
to Diageo at a price of INR1,440/share.
The above transactions will result in Diageo acquiring 27.4% stake in UNSP at a
total consideration of INR57.3b, triggering an obligation on Diageo to launch a
mandatory tender offer (open offer). Diageo will launch a tender offer to acquire a maximum of 37,785,214 shares (26%
of the enlarged share capital) at a price of INR1,440/share.
Assuming the open offer gets fully subscribed, Diageo will own 53.4% of UNSP at
a total consideration of INR111.7b.
The deal values UNSP at an EV of 20x FY12 EBITDA.
Dr Vijay Mallya will continue in his current role as Chairman of UNSP and UB.
Deal conditionalities
Share acquisition from UB is subject to the release of all security interests
(pledging, etc) over the UNSP shares to be acquired by Diageo.
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The receipt of mandatory regulatory approvals (including competition approvals)
in India and elsewhere.
If the preferential allotment is not successful (including where it is not approved
by the shareholders of UNSP), UB has agreed to sell additional shares in UNSP to
Diageo at a price of INR1,440/share to ensure that Diageo has a minimumshareholding of 25.1%.
If the share purchase agreement, the preferential allotment and the tender offer
do not result in Diageo holding a majority interest in UNSP, UB has agreed to vote
its remaining shareholding in UNSP as directed by Diageo for a four-year period.
UB will also vote its UNSP shares to enable Diageo to ensure that its nominees are
appointed to the UNSP board.
Diageo will have the right of first offer over UB's remaining stake if a member of
the UB group proposes to transfer any UNSP shares other than to a permitted
transferee.
UB will also have an option to put some or all of its remaining stake in UNSP toDiageo at a price of INR1,440/share, provided no further mandatory tender offer
is triggered; this put will start once Diageo has first consolidated a full financial
year's results for UNSP and terminate on the 7th anniversary of that date.
Premiumization to get further boost
Rising state-level excise duties, sustained inflation in input costs and elevated
competitive intensity have impacted operating margins of IMFL companies, driving
the shift towards premiumization. Supportive macro factors - rising disposable incomes
and affluence, growth in middle class households, favorable demographics and
changing social attitude toward liquor consumption amongst urban upper middleclass families have also aided the shift. Diageo gaining control of the market leader,
UNSP, which holds 41% volume share, can help accelerate this shift, in our view.
Increasing excise duties and inflationary RM environment has impacted operating margins; driving need for premiumization
Excise duty has gone up for UNSP ... ... and RDCK
Source: Company, MOSL
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EBITDA margins have declined for UNSP.... ... while it has remained stable for RDCK
Source: Bloomberg, Company, MOSL
Input cost also gone up
More than 50% of MRP goes towards duties and taxesItem 2011-12 2012-13
Price of Liquor 9.5 9.5
Bottling and labelling 6.7 6.7
Packaging charges 1.1 1.1
Hologram fixation 0.3 0.3
Ex Factory price (without duty) 17.6 17.6
Excise duty 140.0 141.8
Ex Factory price (with duty) 157.6 159.4
Ex Factory price at Distillery gate 157.6 159.4
Profit @ 3% of distillery 4.7 4.8
Ex-Distiller price (with profit) 162.3 164.2
Freight 1.5 1.5
Godown expenses 1.2 1.2
Wastage @0.5% of Ex-dist cost 0.8 0.8
Wholesale cost price 165.7 167.6
Incidence of licensee fees 1.7 1.7
Profit @1% of wholesale cost price 1.7 1.7
Optimal Wholesale price 169.1 171.0
Proposed Maximum Wholesale price 169.1 171.0
Wholesaler's margin 6.8 6.8
Incidence of retailers licence fees 18.7 19.6
Retailer's profit and expenses 19.2 19.2
Optimal margin for retailers 37.9 38.8
Optimal retail price 207.0 209.7
Proposed MRP 210.0 210.0
Source: Company, MOSL
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While the Premiumization theme is already underway
Growth in Prestige Plus segment higher than overall industry average
Source: Company, MOSL
UNSP brands have underperformed Pernod Ricard All the key brands of Pernod recorded 20% plus volume CAGR
Source: Company, Industry, MOSL
Pernod Ricard India's volumes up 2.2x since 2007
Source: Company, Industry, MOSL
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Salience of prestige and above sub-segments went up recently
Segmentwise distribution
Segment/brand Price point Market 2011-12 2012-13-H1
(INR) Leader All India All India
Whisky
Scotches >1000 100 piper 0.6 0.5Super-premium 600-700 Antiquity 0.3 0.4
Premium-whisky 500-600 Blender Pride 2.7 2.8
Prestige-whisky 400-500 Royalstag 6.1 6.2
Delux- whisky 300-400 MCD No.1 6.9 7.7
Upper regular- whisky 250-300 Imperial Blue 7.4 7.8
Regular- whisky Uptp 250 Bagpiper 29.2 28.2
Medium-whisky 400 Bacardi 0.2 0.2
Delux-rum 350-400 0.1 0.0
Regular-rum 500 Morpheus 0.4 0.6
Semi-premium- brandy 350-500 Courier Napoleon 0.9 1.3
Delux- brandy 300-350 Mansion house 9.0 8.9
Regular-brandy
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Brand investments to accelerate
We expect industry advertising spends as well as brand investments to go up post the
Diageo transaction. In the post-deal conference call, the Diageo management indicated
that it intends to focus on premium brands. We expect disproportionate spends on
premium brands, as Diageo sets out to correct the underinvestment in some of UNSP'spremium brands such as Black Dog. In our view, UNSP has under-invested in premium
brands owing to its weak balance sheet position. Also, the earlier management was
more focused on driving volumes.
Rising competitive intensity - as evidenced by Pernod Ricard's strong market share
gains and financial performance in India - is another reason why we expect brand
investments to accelerate. Pernod Ricard has almost doubled its operating profits in
India in two years.
UNSP's domestic ad-spends as % of sales. Pernod Ricard India's strong financials
(INR m) FY10 FY11 YoY(%)
Sa le s 20,740 27,720 33.7
PBT 3,847 5,078 32.0
PBT margin (%) 18.5 18.3
Tax 1,327 1,728 30.2
Tax rate (%) 34.5 34.0
PAT 2,520 3,350 32.9
PAT margin (%) 12.2 12.1
Might pave the way for easing of import duties
International spirits are subjected to 150% import duty plus several state level duties.
Consequently, international spirit penetration in India is low (Scotch represents only
1% of total whisky consumption in India, compared to 85% in France, China and Russia).
Scotch forms ~1% of India's whisky demand Low Per capita consumption of Scotch
Source: Industry, Company, MOSL
Source: Company, MOSL
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IImported spirits constitue just 1% of total IMFL
Source: Industry, MOSL
One of the understated benefits of the UNSP-Diageo transaction for the industry in
general and Diageo in particular, is the potential relaxation in import duties on
international spirits. UNSP, being the domestic market leader, was the obvious
beneficiary of high import duties and would have resisted any adverse changes. With
management control passing on to Diageo, the probability of import duties being
lowered has increased.
For many years, talks between India and UK, EU and WTO have hovered around
securing a free trade agreement and relaxing the import tariff on spirits. India and EU
have been negotiating a comprehensive Free Trade Pact, officially known as Broad-
based Bilateral Trade and Investment Agreement (BTIA), since June 2007. The India-
EU FTA seeks to open up markets in goods, as well as services and simplify investment
rules to boost bilateral trade that crossed USD90b in 2010-11. India exported goods
worth USD46.8b to the EU and its imports from the region were USD44.5b.
Spirits and Wines, which enjoy high tariff protection in India, are the two sectors
where the EU has been promised increased market access by India in exchange for
lower duties for a host of items including textiles, garments, leather, and agriculture
products. In December 2011, the media had speculated about reduction in import
duty on spirits from 150% to 50%.
INDIA: Wine, spirits import duties to be cut
By just-drinks.com editorial team | 23 December 2011
India's Government is set to reduce the import duty on wine and spirits from 150%
to 50%.
The reduction, announced this week by the Prime Minister's office, is expected to
take effect from February, according to lobbyists in the country. No formal date has
been confirmed yet for full implementation.
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In order to protect local producers, the Government has agreed to a duty-cut on
high-end wine and Scotch whisky brands that do not offer direct competition. Wines
expected to benefit from the move would be Chardonnays, as India does not use
the grape varietal to produce the same quality as Europe.
Negotiations on a free trade agreement between the European Union and India
had been expected to complete in the first quarter of 2012. Last month, the Scotch
Whisky Association (SWA) launched a lobbying mission in the country against the
import tariff barriers.
The duties will come down once the EU-India free trade agreement is in place. As and
when it happens, Diageo can take advantage of UNSP's distribution strengths in India.
The benefits for UNSP shareholders can be through some sort of distribution fee
arrangement, assuming UNSP is not merged with Diageo's local operations. Diageo
can share a certain percentage of sales/profits it earns from the imported superpremium spirits brands with UNSP.
UNSP: Premium valuations can sustain
P/E (x) P/BV (x)
Comparative valuation
CMP Reco EPS (INR) P/E (x) EV/EBITDA (x) RoE (%) EPS Gr. (%)
(INR) FY12 FY13E FY14E FY12 FY13E FY14E FY12 FY13E FY14E FY12 FY13E FY14E FY12 FY13E FY14E
Consumer
Asian Paints 4,328 Neutral 103.1 121.5 142.9 42.0 35.6 30.3 26.8 22.4 18.5 36.0 34.7 33.8 17.3 17.8 17.6
Britannia 496 Se l l 15.6 18.4 23.7 31.7 27.0 21.0 22.7 17.4 12.6 34.9 35.1 37.9 28.5 17.7 28.7
Colgate 1,442 Neutral 32.8 40.0 46.5 43.9 36.0 31.0 33.4 26.8 22.6 109.4 114.7 108.7 10.9 21.8 16.4
Dabur 128 Neutral 3.7 4.4 5.5 34.2 29.3 23.3 26.2 21.3 17.2 37.9 34.7 35.8 14.6 16.5 25.8
Godrej Consumer 735 Neutral 15.5 22.0 27.8 47.5 33.4 26.5 30.5 23.5 18.3 18.7 23.1 24.9 5.7 42.5 26.0
GSK Consumer 3,690 Buy 84.5 105.2 122.6 43.7 35.1 30.1 27.9 23.8 19.8 31.0 32.3 31.6 18.5 24.5 16.5
Hind. Unilever 538 Neutral 11.9 15.5 18.0 45.2 34.7 29.8 34.8 27.4 23.5 74.6 72.1 63.4 19.5 30.3 16.2
ITC 298 Buy 7.9 9.5 11.3 37.8 31.5 26.3 25.1 20.5 16.9 32.8 33.2 33.4 22.3 20.0 19.8
Marico 222 Buy 5.2 6.5 8.3 42.8 34.3 26.9 30.4 22.0 17.6 28.0 20.9 21.5 34.2 25.1 27.4
Nestle 4,765 Neutral 105.7 112.3 133.9 45.1 42.4 35.6 29.9 25.6 21.0 95.7 71.6 63.5 21.7 6.3 19.3
Pidilite Inds. 214 Buy 7.2 8.5 10.2 29.9 25.3 21.0 21.0 16.0 12.9 26.9 24.7 25.0 8.7 18.3 20.7Radico Khaitan 146 Buy 6.0 6.9 8.9 24.2 21.1 16.3 14.1 11.8 9.9 11.9 12.5 14.4 10.9 14.6 29.2
United Spirits 1,992 Buy 19.5 30.0 58.6 102.0 66.4 34.0 27.7 26.3 19.4 4.9 4.3 7.8 -30.9 53.6 95.3
Source: Bloomberg, MOSL
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India an attractive market for spiritsLikely to continue growing at ~10%
1.4m relevant urban consumers enter the legal drinking age every year in India
IMFL market has witnessed strong volume and value growth over the years
IMFL value growth over the years IMFL volume growth over the years
19 million
new LDA +
consumers
4.3 million
TBA +
drinkers
14.7 million
non-
drinkers
1.4 million
urban
consumers
2.9 million
rural
consumers
4.6 million
urban and 10.1
million rural
non-drikers
Source: Company, Industry, MOSL
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Diageo in India: Strong in international spirits segmentHowever, overall presence weak; UNSP deal a strategic coup
Though Diageo has a strong presence in the niche segment of international spirits, its
overall presence in India is limited.
It controls less than 1% of the IMFL market as against the 9% controlled by its MNC
competitor, Pernod Ricard.
Management control over UNSP, the market leader in India and the world's largest liquor
company by volumes, would be a strategic coup for Diageo.
Strong in niche segment of international spirits
Diageo has strong presence in the niche segment of international spirits (scotch,
ultra-premium vodka and rum), which constitutes just 6% of the industry.
with strong India presence in niche segment ofDiageo: Scotch leader globally international spirits (%)
Source: Diageo, MOSL
Growth in scotch and vodka is a function of increasing penetration and preference for
premium liquor, which in turn is driven by favorable macro factors.
The scotch category in India, currently ~ 1.5m cases, is expected to grow at 22% CAGR
for the next five years and outperform the industry. This, according to Diageo's
management, will be driven by continued premiumization and growing penetration.
Diageo's India revenues are also driven by the duty-free business, which continues to
perform well and now contributes ~31% of Diageo's overall India business. It has
outperformed competition, and has 70%+ share in the scotch segment and 80%+ share
in the super-deluxe blended scotch segment.
Brand footprint
Johnnie Walker: Leader in deluxe and super-deluxe scotch; growing much faster
than the 25% overall scotch category growth
VAT 69: Re-launched recently; growing at 52%, more than twice the 22% category
growth
Smirnoff: Dominates the international vodka segment
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Distribution footprint
Reaches 70% of the outlets through own Route to Market and intends to expand
reach further
Market leadership in premium scotch with strong growth over the years
Blended Scotch Diageo Brands F10 - F15 Diageo Share (%)
Price Segments CAGR % FY11 FY15
USD73 and Above JW Blue Label 34 67 71
JW Gold Label
USD61 - 72 JW Black Label 38 60 64
USD30 - 35 J&B 25 59 65
JW Red Label
USD20 - 26 Black & White 20 25 33
VAT 69, Haig
Source: Diageo, MOSL
Diageo has largest number of brands in top 100 premium spirits
Diageo's global brand architecture: Leading global spirits player
Source: Diageo, MOSL
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However, overall India presence limited; some disruptions along the way
Overall, Diageo's presence in India is limited. It controls less than 1% of the IMFL
market vis--vis 9% controlled by Pernod Ricard, its MNC competitor in India. Also,
Diageo does not have a pan-India distribution reach; it is not present in all the states,
which has constrained its market share.
In 2002, Diageo had sold a portfolio of Indian whisky, including Gilbey's Green Label,
to its management which subsequently sold it to UNSP. This marked its exit from the
Indian market for domestically produced whisky. Consequently, Diageo's expansion
efforts in India relied on its international spirits brands.
Diageo's India operations were disrupted in 2009-10 due to mismanagement
(inventory mismanagement, inflated promotional expenses and other losses). Diageo
brought Mr Roland Abella as India Head in March 2009 and has worked at getting focus
back on the business in the last 3-4 years.
Also, the US SEC had imposed a fine of USD16m on Diageo for violating the Foreign
Corrupt Practices Act in India, Thailand and South Korea.
Diageo fined $16-million by SEC for Bribing officials in India, Thailand, South Korea
ET Bureau | Jul 30, 2011
BANGALORE: The US Security and Exchange Commission has slapped penalties of
$16 million on Diageo Plc for bribing officials in India and some other countries to
increase its sales and earn tax benefits.
The maker of Johnnie Walker Scotch Whisky and Smirnoff vodka had offered bribes
of $2.7 million across India, Thailand and South Korea, which the SEC said violated
the US Foreign Corrupt Practices Act. A chunk of these payments, amounting to
$1.7 million, were made in India and Diageo did not accurately account for these in
its books by either masking or excluding them, the SEC said.
"Diageo takes the SEC's investigation findings seriously and regrets this matter," a
company statement said on Wednesday.
"Under the settlement, Diageo has agreed to pay $13,373,820 to the SEC in
disgorgement of profits and pre-judgment interest, to pay $3 million (as) penalty
and to cease and desist from committing any further violations of the books and
records and internal controls provisions of the FCPA," the statement said.
The SEC order said Diageo paid Indian government officials during 2003 to mid-
2009, yielding the company more than $11 million in profit. "Systems and controls
have been enhanced to prevent occurrence of such issues and to reinforce a culture
of compliance embodied in Code of Business Conduct," the statement said.
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Currently, Diageo's India operations are focused onJohnnie Walkerand VAT 69 blended
scotch and Smirnoff vodka. In October 2011, it launched its first Indian-made whisky,
Rowson's Reserve in the premium segment at INR885 for a 750ml bottle in Maharashtra.
Subsequently, the brand was rolled out in Haryana, Punjab and Karnataka.
UNSP deal a strategic coup; high quality distribution netowrk gained
UNSP is the leading IMFL player, with volume sales of 122m cases, 41% market share
by volume and 22 millionaire brands. It services 64,000 outlets across India and 98% of
the on-and-off-premises network. It has manufacturing and bottling presence in all
states, with 40 owned plants and 42 contract tie-ups. Its deal with UNSP, which gives
it management control over the leader in an extremely attractive sprits market, is
thus, nothing less than a strategic coup. Through UNSP, Diageo becomes the market
leader in India, leaving its MNC competitor, Pernod Ricard far behind in the race.
Also, as and when import duties come down, Diageo will be able to use the largest
distribution network in India to push its premium liquor brands in India.
UNSP: The leading IMFL player in volume terms UNSP: Category positioning in India
UNSP deal: What's in it for Diageo?
Strong market presence: UNSP is the leading IMFL player, with volume sales of
122m cases, 41% market share by volume and 22 millionaire brands.
Distribution strength: UNSP services 64,000 outlets, 98% of on-and-off-premises
network.
Manufacturing strength: UNSP has manufacturing and bottling presence in all
states through 40 owned plants and 42 contract tie-ups.
"The combination of United Spirits' strong business with the capabilities which
Diageo brings as the world's leading premium drinks company will ensure that
United Spirits continues to lead the industry in India."
- Diageo's Chief Executive, Mr Paul Walsh
Through UNSP, Diageo becomes the market leader in India, overnight, leaving its
MNC competitor, Pernod Ricard far behind in the race. It gains access to the largest
distribution network in India to push its premium liquor brands in the long term.
Category Rank Volume share (%)
Blended Scotch Whisky 3 19.8
Other whiskies 1 41.8
Brandy 1 41.2
Gin 1 39.5
Vodka 1 47.6
White Rum 2 14.8
Dark Rum 1 43.1
Wine 2 13.4
Total 1 41.3
2011 Indian volume market share by distributor
Source: UNSP, MOSL
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Stock performance (1 year)
Bloomberg UNSP IN
Equity Shares (m) 130.8
52-Week Range (INR) 2,149/450
1,6,12 Rel. Perf. (%) 65/221/165
M.Cap. (INR b) 260.5
M.Cap. (USD b) 4.8
Valuation summary (INR b)
Y/E March 2012 2013E 2014E
Sa l es 87.8 98.4 113.2
EBITDA 11.9 12.7 16.2
NP 2.4 3.7 7.2
Adj. EPS (INR) 19.0 25.3 49.3
EPS Gr. (%) -30.9 33.0 95.3
BV/Sh. (INR) 398 694 629
P/E (x) 104.9 78.9 40.4
P/BV (x) 5.0 2.9 3.2
EV/EBITDA (x) 28.8 24.7 19.0
EV/Sales (x) 3.9 3.2 2.7RoE (%) 4.9 4.3 7.8
RoCE (%) 8.3 8.5 10.9
Shareholding pattern %
As on Sep-12 Jun-12 Sep-11
Promoter 27.8 27.8 28.0
Dom.Inst 4.9 6.1 2.6
Foreign 51.2 54.9 58.2
Others 16.1 11.2 11.2
The party has just begunRe-rating to sustain notwithstanding rich valuations; Buy
Post the announcement of the deal, UNSP stock has been re-rated on the back of
expected improvements in balance sheet (working capital, leverage, and thus, capital
efficiency) post management control by Diageo.
We maintain our positive stance on UNSP - the apparent expensive valuations will be
dwarfed by the attractive and profitable long-term opportunity that IMFL offers.
Though it might not exactly be a like-to-like comparison, a precedent exists in the
deal between Heineken and United Breweries (UBBL). UBBL has continued to trade
at expensive valuations after the Heineken deal in 2009. We reiterate Buy, with a revised target price of INR2,490.
Deal with Diageo to bring plethora of structural improvements
We believe that the deal is beneficial for UNSP shareholders, as it will bring a
plethora of structural improvements. It will help bring focus back on the core IMFL
business, bring in greater transparency, and result in an improvement in
operational as well as financial discipline. We expect Diageo's unwavering focus
on premiumization to:
Help expand margins gradually - the management mentioned 20% operating
margin as an achievable target Improve capital efficiency, led by better working capital and judicious capital
allocation decisions
Reduce leverage cost, post the cash infusion
However, we expect advertising and brand building investments to accelerate,
going forward, as Diageo sets out to correct under-investment in premium brands.
We model 15.3% EBITDA margin for FY15, as we expect margin improvement
trajectory to be gradual. We believe our margin assumptions are conservative and
reflect the complexity of the IMFL market. Though we are confident of structural
margin improvement in the business, accelerated brand investments
(management attested to this) will restrict margin improvement in the initial
years. Given the timeframe involved in deal completion and the regulatory
formalities, we expect most of the benefits to start accruing in 2HFY14.
Short-term benefits
Of the INR57.24b consideration received for the 27.4% stake sale, INR33b will
go into UNSP's balance sheet.
The fund infusion will be used to retire UNSP's debt, which currently stands at
INR83b.
This will immediately reduce interest cost by INR3.3b, assuming interest rate
of 10%.
Interest cost has consumed bulk of UNSP's EBITDA over the years.
Prices as on 30 November 2012
CMP: INR1,992 TP: INR2,490 BuyBSE SENSEX S&P CNX19,340 5,880
United Spirits
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Interest costs consumed~54% of EBITDA in FY12
Net debt and leverage position has worsened over the years
Source: Company, MOSL
Source: Company, MOSL
Medium-term benefits
Better focus on core IMFL business: Though issues surrounding group companies
(Kingfisher Airlines) did not have a direct impact on UNSP's operations, they
sapped top management bandwidth. This resulted in reduced focus on the corebusiness, which was already facing trade issues in Tamil Nadu, higher excise in
West Bengal, rising input costs, worsening working capital and a leveraged balance
sheet.
Source: Company, MOSL
Cash flows too were impacted with inconsistent FCF generation (INR m)
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Increased focus on premiumization: While UNSP has shifted its focus from
garnering volumes towards profitability in the recent past, we believe Diageo's
arrival will hasten the shift. The premium segment of the industry has been
outperforming mid and low-end brands, driven by favorable underlying
consumption drivers - rising incomes, favorable demographics and elevatedaspirations. Rising excise duties in states makes it imperative for UNSP and peers
to drive premiumization to capture better value.
Margin improvement: UNSP's focus on premiumization should help drive
operating margin, which is currently 13-14%. In the conference call, the
management sounded positive about reaching for the 20% operating margin target
in the medium to long term.
EBITDA margins deteriorated ~600bp in four years
Source: Company, MOSL
Adequate brand investments: We expect Diageo to accelerate brand investments
in the premium segment to augment its market presence. We believe the UNSP
management has under-invested in premium brands. For example, Black Dog has
not seen sufficient investment support in our view.
Better capital allocation: We expect improved capital allocation efficiency and
judicious use of the capital, which, in our view, is a key area of improvement for
UNSP.
Working capital improvement: Combination of improved margin profile and
judicious capital allocation decisions should provide incremental succor to the
working capital position, going forward.
Improved operational discipline and transparency: Possible adoption of global
best practices by Diageo will provide significant improvement in transparency
levels as well as operational business discipline.
Long-term benefits
Successful achievement of aforementioned positives should help sustain and
augment stock re-rating in our view.
We believe the IMFL opportunity is attractive in the long term. Being the market
leader with 55%+ market share, UNSP should be the key beneficiary.
With improved capital position and focused management, we see strong structural
improvements in UNSP's business model, going forward.
In this context, we note the substantial re-rating of United Breweries post the
Heineken deal in CY09.
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W&M and IPL team stake divestments are possible upside triggers
Diageo will not hesitate to sell UNSP's 100% subsidiary, Whyte and Mackay, if the
regulator requires it to. The management has said that it does not need W&M's bulk
scotch inventory or its brands. Any announcement pertaining to W&M stake sale can
act as a positive trigger for UNSP. Similarly, UNSP's IPL subsidiary, Royal ChallengersSports can also be sold. The management has, however, clarified that it will continue
with its investments for now.
Whyte and Mackay (W&M)
UNSP acquired Whyte and Mackay (W&M) in May 2007 for GBP595m. Pre-FY11, W&M
was essentially a bulk scotch supplier to global players like Diageo. However, UNSP
did not renew the contract with Diageo when it ended and W&M's EBITDA has since
declined from GBP55m to GBP33m. UNSP's rationale for not renewing the contract
was to use the strategic inventory for in-house brands. Post the UNSP-Diageo deal,
Diageo will control the W&M business and this could lead to anti-trust issues in UKand EU.
W&M financials since acquisition: EBITDA has almost halved since acquisition
W&M P&L May 2007 to FY08 FY09 FY10 FY11 FY12 FY13
(GBP m) March 2008 1Q 2Q 1H
Net Sales 157.10 179.54 176.00 177 140.88 187.01 33.77 72.02 105.79
Gross Profit 86.90 99.31 94.34 93.1 68.76 85.06 12.00 32.88 44.88
EBITDA 52.10 59.54 56.50 57.7 30.32 35.91 1.19 20.40 21.59
P B T 2.70 3.09 0.38 29 12.43 15.41 (1.83) 17.09 15.26
Contrib. Margin (%) 42.1 42.1 40.6 39.5 29.3 26.7 14.4 34.3 27.9
EBITDA Margin (%) 33.2 33.2 32.1 32.6 21.5 19.2 3.5 28.3 20.4
Source: Company, MOSL
Diageo has clarified that W&M will not change the contours of the deal and it will
offload W&M stake if required. W&M's brands and scotch inventory are of limited
strategic value to Diageo. Chief Executive, Mr Paul Walsh has been quoted as saying,
"We are somewhat ambivalent and we will look to see how the regulators feel about
this one and make our decision accordingly. W&M is not a swing issue here."
Media speculation about possibility of stake sale in W&M
Whyte & Mackay may be put on block to smoothen Diageo deal
Arijit Barman, ET Bureau | Nov 17, 2012
MUMBAI: Is Whyte & Mackay on the block? Several analysts and industry watchers
believe the deal with Diageo, the world's largest drinks company, may force Vijay
Mallya's flagship United Spirits to sell the Scottish distiller that it bought five years
ago.
They site two reasons: one, the Glasgow-based Scotch maker may not be of strategic
interest to Diageo, the largest Scotch maker; two, anti-trust regulators in the UK
and Europe are expected to review their combined Scotch production capacity and
market share.
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Analysts say that several industry players such as Italy's Gruppo Campari that owns
the Glen Grant brand, Bacardi and Japanese firm Suntory would want to gulp up
Whyte & Mackay (W&M) that owns brands such as Dalmore and Isle of Jura to scale
up their presence in the Scotch market.
Names of buyout PE funds such as Carlyle are also being speculated upon. "Diageo
has the largest share of Scotch production in the world. So it's logical that W&M will
have to be sold for the Diageo-United Spirits deal to go through," Olly Wehring,
managing editor of Just-Drinks.com, an UK-based beverage industry news provider,
said. "But for the moment, all eyes will be on the regulators and it will be premature
to say anything with a degree of finality," he added.
W&M's EBITDA has declined from GBP57.7m in FY10 to GBP35.9m in FY12. If W&M
were to be sold, we do not expect it to fetch EV/EBITDA of more than 10x, given its
weak brand positioning. Assuming a 10x multiple, W&M stake sale can result in capitalinfusion of GBP250m (INR22.4b at current exchange rates). This coupled with INR33b
of infusion on account of treasury share sale and preferential allotment as part of the
broader Diageo-UNSP deal can bring down UNSP's debt to INR23b. We are not building
in any W&M transaction in our numbers yet.
Royal Challengers Sports (Bengaluru IPL team)
UNSP also owns the Royal Challengers team in IPL through its wholly-owned subsidiary,
Royal Challengers Sports. In the post deal conference call, Diageo's management talked
about continuing its investment in IPL. "The Cricket Team clearly is one of the brand
building mechanisms for Royal Challenge so we envisage it continuing. But clearly,
when we get in and once we complete on this deal, we will look at all of that in terms
of really understanding the most effective way to leverage it." However, the possibility
of sell-out should not be ruled out, in our view.
According to the FY12 balance sheet, book investments in the IPL team stand at
INR1.7b. Term liability towards the team stood at INR2.8b, and is payable over six
years, with INR492.4m payable in FY13. In FY12, the team made a loss of INR70.8m.
Failure of open offer will not have any near-term impact
The failure of the open offer (open offer price way below current market price) will
not have any repercussions on operations, as Diageo has secured board and
management control of the business for the next four years. We do not expect Diageo
to revise its open offer price upwards.
However, if preferential allotment fails, cash infusion into UNSP will be restricted
If the preferential allotment fails, it will constrain infusion of capital for debt reduction
into UNSP. Due to the sharp appreciation in UNSP's stock price post the deal
announcement, there are concerns about the success of the preferential allotment. If
the preferential allotment does not succeed, UB Group will sell additional shares so
as to take Diageo stake to 25.1%, thus triggering an open offer. However, in such an
eventuality, potential cash infusion will be restricted to INR12.24b.
W&M stake sale: EV/EBITDA
of 10x can result in GBP250m
of capital infusion into UNSP
EBITDA 35.9
Multiple 10.0
EV 359
Net Debt 108.2
Equity 250.8
Source: Company, MOSL
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Will the preferential allotment succeed? Most likely, yes.
According to SEBI (DIP) guidelines, 2000, the issue of shares on a preferential basis
can be made at a price not less than the higher of the following:
The average of the weekly high and low of the closing prices of the related shares
quoted on the stock exchange during the six months preceding the relevant date,or
The average of the weekly high and low of the closing prices of the related shares
quoted on a stock exchange during the two weeks preceding the relevant date.
The "relevant date" for the purpose of this clause means the date thirty days prior to
the date on which the meeting of general body of shareholders is held, in terms of
Section 81(1A) of the Companies Act, 1956 to consider the proposed issue.
As per the BSE announcement on 12 November 2012, UNSP has already sent a notice
for postal ballot for the approval of preferential allotment. The document posted byUNSP on the stock exchanges says, "The "relevant date" for the preferential issue, as
per the ICDR Regulations, for the determination of applicable price for the issue of
the Allotment Shares shall be 14 November 2012, which is the date that is 30 (thirty)
days prior to the date on which results of the postal ballot to be conducted for the
purpose of seeking the approval of members to the proposed preferential issue, are
to be declared, which is deemed to be the date of the General Meeting passing the
resolution in accordance with Section 192A of the Companies Act, 1956 read with the
relevant rules thereunder."
Thus, as per the regulatory requirements, the deal will not face any hurdles, as the
relevant weekly averages prior to 14 November 2012 are below the proposed price of
INR1,440/share.
Global spirits valuation
Annual EPS Gr. (%) P/E (x) P/B (x) EV/EBITDA (x)
Performance FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E
Global Alocholic Beverage Cos
Diageo PLC 32.1 11.8 18.2 16.3 6.4 5.3 14.3 13.2
Heineken NV 20.9 18.8 18.1 15.8 2.7 2.5 10.1 8.7
Carlsberg A/S 0.3 12.7 15.6 12.9 1.2 1.1 8.8 8.2
Anheuser-Busch InBev NV 18.2 28.7 18.7 17.1 3.2 2.9 11.5 9.8
SABMiller PLC 27.0 36.8 19.3 17.2 2.7 2.5 14.2 12.9Takara Holdings Inc 12.1 15.0 26.5 22.3 1.3 1.3 0.0 0.0
Thai Beverage PCL 48.8 18.0 16.1 14.4 3.9 3.5 14.2 13.1
Luzhou Laojiao Co Ltd 5.8 11.3 10.9 8.7 4.6 3.4 7.1 5.5
Pernod-Ricard SA 19.8 14.9 17.3 15.2 2.0 1.9 13.0 12.0
Source: Company, MOSL
Maintain Buy, with a revised target price of INR2,490
We maintain our Buy rating, with a revised target price of INR2,490 (EV of 20x FY15E
EBITDA). The next few quarters could be challenging on account of sustained pressure
in Tamil Nadu and West Bengal markets coupled with business transition post the
deal completion.
Concerns/risks: (1) Delay in expected margin improvement, (2) any regulatory
uncertainty pertaining to the deal.
Maintain Buy, with a revised
target price of INR2,490
Target Price FY15E
EBITDA 20,120
EV/EBITDA 20
EV 402,409
Net Debt 40,681
Equity 361,728
No of Shares 145
Value/Share 2,490
Current Price 1,992
Upside (%) 24.9
Source: Company, MOSL
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Source: Bloomberg
UBBL case study: Rich valuations sustained after Heineken deal
United Breweries' (UBBL) performance improved post the deal with Heineken.
Volumes and profits increased significantly post the transaction. Market share went
up, leverage came down and PAT moved up 3x over FY09-12. Consequently, UBBL got
re-rated.
UBBL's financial performance improved after the Heineken deal
(INR m) FY07 FY08 FY09 FY10 FY11 FY12
Volumes (m cases) 66 75 82 101 125 133
Growth (%) 13.9 9.4 22.6 24.2 6.0
Market share (%) NA 48.0 50+ 54.0 54.5
Net Sales 11,968 15,590 19,295 22,755 30,598 36,252
Growth (%) 30.3 23.8 17.9 34.5 18.5
EBITDA 1,737 2,157 2,807 3,174 4,353 4,659
Margin (%) 14.5 13.8 14.5 13.9 14.2 12.9
Interest 412 576 1,054 665 779 989
EBIT 1,325 1,581 1,752 2,509 3,574 3,670
Profit before Tax 851 850 856 1,469 2,266 2,182
Net Profit 550 542 456 896 1,475 1,398
Margin (%) 4.6 3.5 2.4 3.9 4.8 3.9
Net Debt 4,795 6,694 7,138 7,035 6,491 6,995
Source: Company, MOSL
Re-rating to sustain notwithstanding rich valuations
Post the Diageo deal announcement, UNSP has rallied significantly
leading to significant re-ratingP/E (x) P/BV (x)
Source: Bloomberg, MOSL
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Evolution of United Breweries (UBBL)
Until 2003
Three-way JV with S&N and Mr Ravi Jain: United Breweries (UBBL) had a subsidiary,
McDowell AlcoBev. In 2002, McDowell AlcoBey passed on to a three-way JV
between UB Group company, UB Beer, Scottish and Newcastle (S&N) and Mr RaviJain (through Accra Investments), and was re-named as Millennium AlcoBey. The
three JV partners held equity in the ratio 40:40:20 and Mr Ravi Jain headed the JV.
(In 2006, Mr Jain sold his stake equally to UB Group and S&N for INR180m).
Strategic relationship with S&N: Scottish and Newcastle (S&N) formed a strategic
partnership with the UB Group by investing INR3.9b in the form of equity shares
and preference shares in UB Beer and McDowell AlcoBev. In UB Beer, S&N invested
INR10m in up to 1% equity shares and INR2b in redeemable optionally convertible
preference shares with a dividend of 8.5% per annum. In AlcoBey, it invested
INR540m to subscribe to 40% of the voting equity shares and INR1.35b to subscribe
to preference shares. The agreement between UB Group and S&N envisaged marketing of S&N's
international brands in India, including its flagship brands Kronenbourg,Johnsmith
and Newcastle Brown Ale. The UB Group would utilize S&N's overseas network to
market its beer brands, including the flagship brand, Kingfisher.
2004-05
In December 2004, the UB Group entered into an agreement with Scottish and
Newcastle (S&N), allowing it to acquire 37.5% in United Breweries (UBBL).
S&N received 17.5% of UBBL's equity through a preferential allotment for a
consideration of INR2.17b at INR575/share. It then made a public offer and acquiredanother 20% stake at INR575/share. It then invested further INR2.47b through
redeemable preference shares (non-convertible), with a coupon rate of 3%.
After this deal, Millennium AlcoBev was merged with UBBL.
Post 2008 (Heineken-UBBL)
In January 2008, S&N's global operations were jointly acquired by Carlsberg and
Heineken for USD15.4b. Consequently, Heineken got hold of S&N's 37.5% stake in
UBBL.
This was opposed by Dr Vijay Mallya, as Heineken already owned ~44% in Asia
Pacific Breweries (APB). APB used to sell beer brand, Tiger in India. Heinekenwould, therefore, have dual interest in India - one with APB and one with UBBL.
The UB Group even moved the Bombay High Court to restrain Heineken from
exercising management rights that were accorded to S&N, citing that Heineken
was part of a rival firm, APB.
This issue was resolved in December 2009. Heineken brought APB's assets in India
and transferred them to UBBL. Besides, it transferred rights to brew, bottle and
distribute Heineken brands in India to UBBL and paid a one-time fee of INR3b.
The "peace" deal ensured that Heineken got the same rights - power to nominate
the Chief Financial Officer and equal board representation, which S&N had
enjoyed.
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UNSP: Financials and Valuation
Income Statement (INR Million)
Y/E March 2011 2012 2013E 2014E 2015E
Net Sales 68,586 82,141 92,364 106,470 123,699
Other Operating Inc 5,175 5,652 6,036 6,754 7,509
Total Revenue 73,762 87,794 98,400 113,224 131,207
Change (%) 15.9 19.0 12.1 15.1 15.9
Total Expenditure -63,115 -75,914 -85,726 -97,047 -111,087
EBITDA 10,647 11,879 12,674 16,177 20,120
Change (%) -4.3 11.6 6.7 27.6 24.4
Margin (%) 14.4 13.5 12.9 14.3 15.3
Depreciation -1,023 -1,448 -1,695 -1,846 -1,999
Int. and Fin. Charges -4,985 -7,525 -5,925 -3,563 -2,866
Other Income - Recurring 904 857 867 886 909
Profit before Taxes 5,543 3,764 5,921 11,655 16,165
Change (%) 11.9 -32.1 57.3 96.9 38.7Margin (%) 7.5 4.3 6.0 10.3 12.3
Tax 2,098 1,374 2,250 4,487 6,223
Tax Rate (%) 37.8 36.5 38.0 38.5 38.5
Minority Interest -12 -12 -12 -12 -12
Adjusted PAT 3,458 2,390 3,671 7,168 9,941
Change (%) 14.3 -30.9 53.6 95.3 38.7
Margin (%) 4.7 2.7 3.7 6.3 7.6
PAT after Non-rec. (Exp)/Income 5,695 3,170 3,671 7,168 9,941
Balance Sheet (INR Million)
Y/E March 2011 2012 2013E 2014E 2015E
Share Capital 1,259 1,259 1,453 1,453 1,453
Reserves 40,527 47,254 83,264 89,757 98,948
Minority Interest 175 200 200 200 200
Net Worth 41,961 48,712 84,917 91,411 100,601
Loans 67,107 88,002 54,792 48,582 41,372
Deffered Tax Liabilities -325 -209 -17 207 518
Capital Employed 108,743 136,506 139,692 140,200 142,491
Gross Block 26,972 40,222 43,472 46,722 49,972
Less: Accum. Depn. -7,573 -9,020 -10,716 -12,561 -14,560
Net Fixed Assets 19,399 31,201 32,756 34,160 35,411
Capital WIP 1,291 1,100 2,350 1,850 1,850
Goodwil l 44,320 49,797 49,797 49,797 49,797
Investments 1,544 1,539 1,539 1,539 1,539
Curr. Assets, L&A 61,842 74,487 78,059 83,490 91,408
Inventory 21,168 26,218 29,385 32,261 35,947
Account Receivables 14,825 21,167 23,454 25,437 27,679
Cash and Bank Balance 4,944 5,110 2,098 315 997
Bank Deposit 1,426 104 477 40 273
Others 19,479 21,888 22,645 25,437 26,511
Curr. Liab. and Prov. 20,102 24,236 27,427 33,254 40,132
Account Payables 13,304 16,356 18,602 23,265 28,758
Other Liabilities 5,026 6,013 6,740 7,755 8,987
Provisions 1,771 1,867 2,086 2,234 2,387
Net Current Assets 41,741 50,251 50,632 50,235 51,276
Msc Expenses 448 2,618 2,618 2,618 2,618
Application of Funds 108,742 136,506 139,692 140,200 142,491
E: MOSL Estimates
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UNSP: Financials and Valuation
Ratios
Y/E March 2011 2012 2013E 2014E 2015E
Basic (INR)EPS 28.2 19.5 30.0 58.6 81.2
Cash EPS 36.6 31.4 43.8 62.0 82.2
BV/Share 342.8 397.9 693.7 629.0 692.2
DPS 2.5 3.0 4.0 4.5 5.0
Payout % 8.9 15.4 13.3 7.7 6.2
Valuation (x)
P/E 102.0 66.4 34.0 24.5
Cash P/E 63.5 45.4 32.1 24.2
EV/Sales 3.9 3.2 2.7 2.3
EV/EBITDA 28.8 24.6 19.0 14.9
P/BV 5.0 2.9 3.2 2.9Dividend Yield (%) 0.2 0.2 0.2 0.3
Return Ratios (%)
RoE 8.2 4.9 4.3 7.8 9.9
RoCE 9.7 8.3 8.5 10.9 13.4
Working Capital Ratios
Debtor (Days) 73 88 87 82 77
Asset Turnover (x) 0.7 0.6 0.7 0.8 0.9
Leverage Ratio
Debt/Equity (x) 1.6 1.8 0.6 0.5 0.4
Cash Flow Statement (INR Million)
Y/E March 2011 2012 2013E 2014E 2015E
OP/(loss) before Tax 10,647 11,879 12,674 16,177 20,120
Int./Div. Received 904 857 867 886 909
Interest Paid -4,985 -7,525 -5,925 -3,563 -2,866
Direct Taxes Paid -2,098 -1,374 -2,250 -4,487 -6,223
Incr/Decr in WC -11,211 -9,666 -3,021 -1,823 -126
CF from Operations -6,742 -5,828 2,345 7,190 11,814
Extraordinary Items 2,238 780 0 0 0
(Incr)/Decr in FA -5,452 -18,536 -4,500 -2,750 -3,250
(Pur)/Sale of Investments -279 5 0 0 0
Msc Exp 0 2,170 0 0 0
CF from Invest. -3,493 -15,581 -4,500 -2,750 -3,250
Issue of Shares -1,173 4,039 33,144 12 12
(Incr)/Decr in Debt 8,603 20,895 -33,210 -6,210 -7,210
Dividend Paid -381 -458 -610 -686 -763
Others 1,871 -4,224 191 224 311
CF from Fin. Activity 8,919 20,252 -485 -6,660 -7,650
Incr/Decr of Cash -1,316 -1,156 -2,640 -2,220 915Add: Opening Balance 7,686 6,370 5,214 2,575 355
Closing Balance 6,370 5,214 2,574 355 1,270
E: MOSL Estimates
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Premiumization strategy workingReiterate Buy; potential upside of 24%
Radico Khaitan (RDCK) has demonstrated its ability to drive premiumization - the
salience of premium brands has risen from 8% of total volumes in FY09 to 16% in
1HFY13.
The IMFL pricing environment is turning favorable - RDCK expects price hike from
Andhra Pradesh, its largest market, in November.
We expect RDCK to deliver strong 23% earnings CAGR over FY12-15, led by 230bp
margin improvement.
The stock has appreciated ~20% since our initiation on 31 October 2012 and subsequentannouncement of the Diageo-UNSP deal. We reiterate Buy, with a revised price
target of INR181 - 24% upside.
Premiumization strategy working
RDCK has demonstrated its ability to drive premiumization in its IMFL business,
reflected in the consistent rise in salience of its premium brands from 8% of total
volumes in FY09 to 16% in 1HFY13. Magic Moments Vodka has continued to
outperform the segment and has been RDCK's single largest success story in the
last five years. Morpheus Brandy is also gaining trade acceptance and has
witnessed 4x jump in its volumes in the last two years, albeit on a low base.
Recent launches have been in premium/super-premium segments
RDCK's launches in the last three years have all been in the premium/super-
premium segments. It launched super-premium Verve Vodka in 2QFY13.
IMFL pricing environment turning favorable at the margin
Our discussions with industry players suggest improvement in the pricing
environment for the IMFL industry. There has been modest increase in the quantum
of price hikes received by the industry, especially from South Indian states.
Secondly, the time lag between demand and approval of price hike has come
down. RDCK has received price hikes from (1) Kerala in 1QFY13, (2) Madhya Pradesh,
Jharkhand, Bihar, Orissa, and CSD in 1HFY13.
Price hike in Andhra Pradesh can provide upside in 2H
Andhra Pradesh, one of the largest contributor for RDCK (11%) has granted price
hike and Karnataka is expected to do the same. This can provide good upside to its
IMFL revenue in 2HFY13. Successful premiumization strategy plus incrementally
better pricing environment augurs well for RDCK's gross and operating margins in
the medium term.
Suitable partner for foreign liquor companies
RDCK's reach, especially in North India and CSD markets, and its position as the
third-largest liquor company in India makes it a suitable partner for any foreign
Stock performance (1 year)
Bloomberg RDCK IN
Equity Shares (m) 132.6
52-Week Range (INR) 151/92
1,6,12 Rel. Perf. (%) 17/-5/2
M.Cap. (INR b) 19.4
M.Cap. (USD b) 0.4
Valuation summary (INR b)Y/E March 2012 2013E 2014E
Sa l es 11.4 13.0 15.0
EBITDA 1.7 2.1 2.6
NP 0.8 0.9 1.2
EPS (INR) 6.0 6.9 8.9
EPS Gr. (%) 10.9 14.6 29.2
BV/Sh. (INR) 52.4 58.3 65.7
P/E (x) 24.2 21.2 16.4
P/BV (x) 2.8 2.5 2.2
EV/Sales (x) 2.2 2.1 1.8
EV/EBITDA (x) 14.8 12.4 10.4EV/Sales (x) 2.2 2.1 1.8
RoE (%) 11.9 12.5 14.4
RoCE (%) 10.0 11.0 12.6
Shareholding pattern %
As on Sep-12 Jun-12 Sep-11
Promoter 40.6 40.4 39.9
Dom. Inst 7.8 10.1 15.3
Foreign 27.5 26.4 26.3
Others 24.2 23.1 18.5
Prices as on 30 November 2012
CMP: INR146 TP: INR181 BuyBSE SENSEX S&P CNX19,340 5,880
Radico Khaitan
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liquor player trying to gain a foothold in India, the fastest growing liquor market in
the world.
Strong earnings CAGR, supportive valuations; Buy
RDCK is an attractive play on the growing IMFL opportunity, underpinned by favorabledemographic factors like rising disposable income, growing youth population, and
changing social attitudes towards drinking. It has 33 bottling units spread across India,
through which it covers 90% of the retail outlets. Its premiumization strategy is working
and we expect the contribution of premium brands to increase from 16% of total
volumes to 20% by FY15. This would be the key driver for a robust 22% CAGR in EBITDA
over FY12-15.
We expect RDCK to deliver strong 23% earnings CAGR over FY12-15, led by 230bp
margin improvement. The stock trades at 21.1 FY13E and 16.3 FY14E earnings. We had
pointed out in our Initiating Coverage report, In High Spirits, dated 31 October 2012,"Any potential deal involving the sector leader can have a positive rub-off effect on
peer valuations, including RDCK's". Since our initiation and subsequent announcement
of the Diageo-UNSP deal, the stock has appreciated by 25%. We now value the stock
at 18x Sep'14E EPS. Our revised target price of INR181 implies 24% upside. Buy.
RDCK's premiumization is strategy working
Salience of premium brands rising Volume growth trend (%)
Source: Company, MOSL
Brand-wise quarterly volumes (m cases)
Brands 1QFY11 2QFY12 3QFY13 4QFY14 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13
Magic Moments Vodka 5.1 4.4 5.0 4.4 6.2 5.2 5.8 5.1 7.3 6.0
Morpheus Brandy 0.5 0.6 0.6 0.6 0.7 0.9 1.1 0.9 1.1 1.2
Premium Brands 5.6 5.0 5.6 5.0 6.9 6.1 6.9 6.0 8.4 7.3
Other Main Line Brands 24.7 22.5 25.7 21.3 27.7 24.5 25.7 24.5 29.9 26.2
Total main line brands 30.4 27.5 31.4 26.2 34.6 30.6 32.6 30.5 38.3 33.4
Other brands 12.0 10.4 9.6 13.5 13.0 11.1 12.6 11.9 13.3 11.5
Total 42.4 38.0 40.9 39.8 47.6 41.7 45.2 42.5 51.5 44.9
Source: Company, MOSL
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Magic Moments: RDCK's key success story in the last five years
RDCK's market share in vodka has improved consistently led by Magic Moments
Source: Company, MOSL
Pricing environment turning favorable
Sl. No. State-Name Brand-Name % Increase Effetive Date
RDCK has received price hikes from several states
1 Karnataka 8PM-Whisky 6 1st-April,2012-Onwards
Old-Admiral Brandy 6 1st-April,2012-Onwards
Crown Whisky 7 1st-April,2012-Onwards
Radico-Gold-Whisky 6 1st-April,2012-Onwards
Royal-Lancer-Whisky 6 1st-April,2012-Onwards
After-Dark-Whisky 1st-April,2012-Onwards
Magic-Moments-Vodka 11 1st-April,2012-Onwards
Magic-Moments-Flavours-Vodka 33 1st-April,2012-Onwards
Morpheus-Xo-Brandy 19 1st-April,2012-Onwards2 Bihar 8PM-Whisky 19 1st-April,2012-Onwards
Magic-Moments-Vodka 18 1st-April,2012-Onwards
3 Jharkhand 8PM-Whisky 20 1st-April,2012-Onwards
Magic-Moments-Vodka 13 1st-April,2012-Onwards
4 Madhya-Pradesh 8PM-Whisky 13 1st-April,2012-Onwards
Magic-Moments-Vodka 12 1st-April,2012-Onwards
Magic-Moments-Flavours-Vodka 9 1st-April,2012-Onwards
5 Chattisgarh 8PM-Whisky 12 1st-April,2012-Onwards
Magic-Moments-Vodka 10 1st-April,2012-Onwards
Magic-Moments-Flavours-Vodka 19 1st-April,2012-Onwards
6 Orissa 8PM-Whisky 14 1st-September,2012-Onwards
Magic-Moments-Vodka 9 1st-September,2012-Onwards
Black Cat Rum 16 1st-September,2012-Onwards
7 Kerala 8PM-Whisky 6 1st-August,2012-Onwards
Contessa-Rum 6 1st-August,2012-Onwards
8 Bermuda rum 6 1st-August,2012-Onwards
m2 6 1st-August,2012-Onwards
OAB 6 1st-August,2012-Onwards
MXO 6 1st-August,2012-Onwards
EXCELLENCY 6 1st-August,2012-Onwards
CWR 6 1st-August,2012-Onwards
BGB 6 1st-August,2012-Onwards
Source: Company, MOSL
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RDCK's recent launches have been in premium/super-premium segments
Source: Company, MOSL
EBITDA margin to expand 230bp over FY12-15
Source: Company, MOSL
RDCK: Valuations still supportive
P/E (x) P/BV (x)
Source: Bloomberg, MOSL
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RDCK: Financials and Valuation
Income Statement (INR Million)
Y/E March 2011 2012 2013E 2014E 2015E
Net Sales 9,469 11,445 12,986 14,977 17,191
Change (%) 12.9 20.9 13.5 15.3 14.8Total Expenditure 7,975 9,714 10,842 12,409 14,162
EBITDA 1,494 1,731 2,143 2,568 3,029
Change (%) 9.3 15.9 23.8 19.8 17.9
Margin (%) 15.8 15.1 16.5 17.1 17.6
Depreciation 271 328 376 423 454
Int. and Fin. Charges 293 611 681 677 537
Financial Other Income 47 237 169 153 3
Profit before Taxes 977 1,028 1,255 1,621 2,041
Change (%) 94.7 5.3 22.0 29.2 25.9
Margin (%) 10.3 9.0 9.7 10.8 11.9
Tax 257 229 339 438 551
Tax Rate (%) 26.3 22.3 27.0 27.0 27.0
Profit after Taxes 720 799 916 1,183 1,490
Change (%) 72.4 11.0 14.6 29.2 25.9
Margin (%) 7.6 7.0 7.1 7.9 8.7
Extraordinary Income 8 -163 0 0 0
Reported PAT 728 637 916 1,183 1,490
Balance Sheet (INR Million)
Y/E March 2011 2012 2013E 2014E 2015E
Share Capital 265 265 265 265 265
Reserves 6,249 6,687 7,476 8,452 9,680Net Worth 6,514 6,953 7,742 8,717 9,946
Loans 4,935 6,547 7,568 7,518 7,158
Deferred Tax 498 563 689 851 1,055
Capital Employed 11,947 14,063 15,999 17,086 18,159
Gross Block 5,728 6,870 7,670 8,470 9,270
Less: Accum. Depn. 1,539 1,847 2,223 2,647 3,101
Net Fixed Assets 4,189 5,022 5,446 5,823 6,169
Capital WIP 219 48 300 200 200
Investments 1,207 1,113 1,134 1,134 984
Curr. Assets, L&A 8,059 10,139 11,620 12,917 14,312
Inventory 1,269 1,774 1,920 2,218 2,370
Account Receivables 3,191 3,478 4,216 4,634 5,329
Cash and Bank Balance 94 218 283 282 251
Others 3,506 4,669 5,201 5,783 6,361
Curr. Liab. and Prov. 1,728 2,528 2,770 3,256 3,774
Account Payables 840 1,187 1,212 1,443 1,669
Other Liabilities 295 1,148 1,320 1,518 1,746
Provisions 593 193 238 295 359
Net Current Assets 6,332 7,611 8,850 9,661 10,538
Miscelleneous Exp./Others 0 268 268 268 268
Application of Funds 11,947 14,063 15,999 17,086 18,159E: MOSL Estimates
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RDCK: Financials and Valuation
Ratios
Y/E March 2011 2012 2013E 2014E 2015E
Basic (INR)EPS 5.4 6.0 6.9 8.9 11.2
Cash EPS 7.5 8.5 9.7 12.1 14.6
BV/Share 49.1 52.4 58.3 65.7 74.9
DPS 1.0 1.3 1.7 0.0 0.0
Payout % 15.0 15.4 17.6 17.6 17.6
Valuation (x)
P/E 24.2 21.2 16.4 13.0
Cash P/E 17.2 15.0 12.1 10.0
EV/Sales 2.2 2.1 1.8 1.5
EV/EBITDA 14.8 12.4 10.4 8.7
P/BV 2.8 2.5 2.2 1.9
Dividend Yield (%) 0.9 1.2 0.0 0.0
Return Ratios (%)
RoE 11.6 11.9 12.5 14.4 16.0
RoCE 10.2 10.0 11.0 12.6 14.2
Working Capital Ratios
Debtor (Days) 47 42 45 43 43
Asset Turnover (x) 0.8 0.8 0.8 0.9 0.9
Leverage Ratio
Debt/Equity (x) 0.8 0.9 1.0 0.9 0.7
Cash Flow Statement (INR Million)
Y/E March 2011 2012 2013E 2014E 2015E
OP before Tax 930 792 1,086 1,468 2,038
Int./Div. Received 47 237 169 153 3
Depreciation and Amort. 271 328 376 423 454
Interest Paid 293 611 681 677 537
Direct Taxes Paid 210 163 213 276 347
Incr in WC 1,256 1,155 1,174 812 908
CF from Operations 75 650 925 1,633 1,777
Extraordinary Income 8 -163 0 0 0
Incr in FA -88 971 1,052 700 800
Other Assets 13 268 0 0 0
Pur of Investments 314 -94 20 0 -150
CF from Invest. -217 -1,040 -1,072 -700 -650
Issue of Shares -7 -70 0 0 0
Interest Paid 293 611 681 677 537
Incr in Debt 474 1,612 1,021 -50 -360
Dividend Paid 92 108 123 161 208
Others Inflows -178 -308 -4 -47 -54
CF from Fin. Activity -96 515 213 -934 -1,159
Incr/Decr of Cash -238 124 66 -1 -31
Add: Opening Balance 332 94 218 283 282Closing Balance 94 218 283 282 251
E: MOSL Estimates
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Emerging playerStrong presence in South India; robust manufacturing network
Tilaknagar Industries' (TLNGR) robust financial performance in the last five years has
demonstrated its ability to capitalize on the rapidly premiumizing IMFL industry.
While its geographical presence is limited, its strength in South India and good
manufacturing network makes it an attractive partner for foreign liquor companies.
TLNGR has recently announced a strategic bottling agreement with Pernod Ricard
India.
Stock trades at 13.6x FY13E and 10x FY14E EPS (Bloomberg consensus). Not Rated.
Strong presence in South India, with diversified portfolio of 40 brands
TLNGR is a South India focused IMFL company, with Karnataka, Andhra Pradesh,
Kerala, Tamil Nadu and Puducherry being its key markets. In FY12, it sold 13.2m
cases. It has historically been strong in the brandy segment. It has a diversified
portfolio of 40 brands, but Madira Rum and Mansion House Brandyare its flagship
millionaire brands. TLNGR has expanded its distillation capacity 4x in two years.
To increase its market presence in North and East India, it has recently acquired
26% equity stake in Mason and Summers Marketing Services (MSMSPL).
Robust financial performance; focusing on premiumizationTLNGR has grown volumes 10x since FY07, driven by enhanced reach, strong growth
in its core brandy segment and new product launches. Over FY07-12, sales have
grown at a CAGR of 43% and PAT at a CAGR of 40%, with EBITDA margin at 22-27%.
It carries INR5b debt with leverage of 1x. TLNGR has been focusing on
premiumization and has recently launched Seven Islands Vintage Single Malt Scotch
Whisky, Courrier NapoleonBlue and Green Brandy. In March 2012, it had launched
White House Rum in Kerala.
2QFY13 volumes weak; better mix, price hikes enable robust sales
growth
Volumes grew just 2% in 2QFY13, owing to issues in its key Tamil Nadu market.
However, better mix and price hikes resulted in 22% sales growth. TLNGR expects
price hikes in Karnataka and Andhra Pradesh in 2HFY13, which will drive revenues.
Rising input costs, however, pose a threat to margins, given that over 80% of its
business comes from government controlled markets. The CSD segment continues
to face challenges.
Strategic bottling agreement with Pernod Ricard
TLNGR recently announced a strategic bottling agreement with Pernod Ricard India
(PRI). It will bottle PRI's brands at its facilities in Maharashtra and Andhra Pradesh,
thus increasing utilization of its owned facilities. In Maharashtra, it will produce
50,000 cases per month for PRI in FY13, which it intends to increase to 200,000
cases by FY15.
Stock performance (1 year)
Shareholding pattern %
As on Sep-12 Jun-12 Sep-11
Promoter 56.7 56.6 54.3
Dom. Inst 6.1 6.1 3.4
Foreign 12.4 13.2 19.6
Others 24.8 24.1 22.8
CMP: INR71 Not RatedBSE SENSEX S&P CNX19,340 5,880
Bloomberg TLNGR IN
Equity Shares (m) 120.4
52-Week Range (INR) 75/35
1,6,12 Rel. Perf. (%) 34/33/130
M.Cap. (INR b) 8.5
M.Cap. (USD b) 0.2
Valuation summary (INR b)
Y/E March 2010 2011 2012
Sa l es 5.5 6.5 8.4
EBITDA 0.8 1.2 1.5
NP 0.3 0.4 0.5
Adj. EPS (INR) 10.3 3.3 3.8
EPS Gr. (%) 77.2 12.9 19.4
BV/Sh. (INR) 39 28 34
P/E (x) 22.6 13.9 13.6
P/BV (x) 2.1 1.5 1.4
EV/EBITDA (x) 10.2 9.0 7.9
EV/Sales (x) 1.5 1.6 1.4
RoE (%) 39.1 28.2 33.7
RoCE (%) 20.3 15.0 14.3
Prices as on 30 November 2012
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TLNGR's sales and PAT have grown at 43% and 40%, respectively over FY07-12
Operating margins have been volatile Revenues predominantly from South India
driven by 10x jump in volumes
Source: Company, MOSL
Source: Company, MOSL
Source: Company, MOSL
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There is today a sea change in social values and attitudes towards drinking. This is
aided by the growing proportion of nuclear families, urbanization and changing social
ethos. All these factors indicate sustained demand growth for the liquor industry in
the coming years. Also, the middle class population is expected to grow from 120m to
600m (45% of total) by 2025, which augurs well for premium spirits.
Rising income levels
India is one of the fastest growing economies in the world, with more than 7.5% GDP
growth in the past three years. Per capita income has increased 3.6x in the last 12
years to INR50k and the long-term outlook appears bullish. With robust economic
growth, an increasing proportion of the population is coming into the consuming
class. Both the affluent and the middle class income groups are expected to account
Key drivers of IMFL demand
Favorable demographics
The age profile of the Indian population is most conducive for sustained growth in
liquor consumption. People in the age group 20-59 years are considered as primary
consumers of liquor and more than half of India's population is below 30 years. Over
the next 10 years, 150m potential new consumers are expected to come of drinking
age.
4.3m relevant consumers to enter drinking age every year; youth demographics to support IMFL growth
Source: GOI, Company, MOSL
Rising per capita disposable income (INR)
Source: GOI, MOSL
Annexure 1:
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for more than 80% of national consumption by 2025. Moreover, we expect discretionary
income to grow at a much faster pace than GDP growth, which will boost demand for
lifestyle products including liquor.
Low per capita consumptionIndia has very low per capita consumption of liquor in comparison to global standards
at 0.9 liters per annum. This is despite the per capita consumption growing at 22% in
the past five years. The per capita consumption pattern indicates huge potential for
the spirits industry. Even a small increase in per capita consumption can significantly
alter the growth rates and aggregate consumption levels of liquor in the country. As
factors like age composition, income levels and social attitudes are positively inclined,
we expect the Indian liquor industry to report steady double-digit growth in the
coming years.
Per capita consumption of liquor is very low in India
Source: Industry, MOSL
Forecast Sales of Alcoholic Drinks by Category: % Total Volume Growth
% total volume growth
2015/16 2011-16 CAGR
Beer 9.3 10.3
RTDs/High-Strength Premixes 7.0 8.0
Spirits 8.5 9.9
Wine 6.8 6.2
Alcoholic Drinks 8.9 10.0
Source: Industry, MOSL
World market size India market size
Source: Industry, MOSL
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Spirits - sales mix to gradually shift in favor of IMFL
The IMFL (Indian made foreign liquor) market is roughly 250m cases (12 bottles of
750ml each) and constitutes 47% of the total liquor market in India. The rest is accounted
for by country liquor, which contributes 53% of the market. The IMFL segment isgrowing at 9-10% while country liquor has been growing at 3-4%.
Mix shifting in favor of IMFL IMFL market share
Whiskey dominates IMFL in India in volumes.... ..... and value
Attractive growth ahead for IMFL
Annexure 2:
Source: Industry, Company, MOSL
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IMFL expected to register 10% CAGR
Source: Company, MOSL
States like Andhra Pradesh, Tamil Nadu and Kerala have banned country liquor. This
stems from poor quality materials, hazardous methods of production and tax evasion
by the local players. The past trend suggests that ban on country liquor leads to
increased demand for IMFL, particularly at the lower end and economy segments.
IMFL has been gaining market from country liquor in the past few years, as younger
population, favorable demographics and rising consumer aspirations have resulted
in higher growth for IMFL. We expect this trend to gain further momentum, with IMFL
growing at 11-12% for the coming few years. This will happen as 12-13% nominal
income growth will increase the discretionary income at much higher level. This will
boost the growth prospects even though increase in demand for IMFL is expected to
be lower than the decline in consumption of country liquor. We the expect share of
IMFL in total liquor market to increase from 31% in FY06 to 37% by FY10.
Geographical spread of IMFL
Source: Company, MOSL
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Key segments of IMFL industry
Whisky (~57% of IMFL volumes)
Whisky is the largest segment of the IMFL industry and contributes ~57% of the
volumes. The segment has seen acceleration in growth rates from 6-6.5% to current
levels of 8-8.5%. UNSP leads in almost all the Whisky segments except Scotch, which
is dominated by global players. We expect Whisky growth rates to accelerate to
double digits in line with rising growth rates of IMFL. Premium segments in Whisky
have been growing at a faster pace due to low base and rising consumer affluence
even as Regular and Economy segments continue to account for bulk of the volumes.
We expect the trend to continue in the coming years as well.
Whisky market share
Steady growth in Whisky consumption in India.... India accounts for 48% of global whisky consumption
Brandy (~20% of IMFL volumes)
Brandy accounts for ~20% of the IMFL and 5.6% of the entire spirits market. Brandy is
perceived to be older people's drink due to health benefits associated with it. Andhra
Pradesh and Tamil Nadu account for more than 80% of Brandy sales, with UNSP's
McDowell No 1 dominating the Regular segment of the market.
Annexure 3:
Source: Industry, MOSL
Source: Industry, Company, MOSL
)
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Segmental split of Brandy category
Category Brandy Price Key Brands & Key Players
Mkt share Range segment Share Share
(%) (INR) (%) (%)
Premium 6.1 600-800 Brihans Napoleon-23, Tilaknagar - 46,
Mansion House - 46 US 30, Radico 46Semi Premium 2.1 500-575 Bejosis - 76, Joie De Franc - 9 Amrut - 76, US - 9
Regular 36.4 400-480 Honey Bee -22, McDowell No1 - 69 US-91
Medium 25.8 300-380 John Exshaw -31, Golconda - 23, US- 54, Radico - 32
Old Admiral - 28
Economy 29.6 200-280 Monitor Brandy (47%) Shivas - 47
Source: Industry, Company, MOSL
Brandy market share.... Tamilnadu accounts for bulk of Brandy consumption
Source: Industry, Company, MOSL
RDCK has emerged as the second largest player in the Brandy market and has
consolidated its position with the acquisition of Brihans. RDCK now controls 46%
market share in the Premium segment and 32% market share in the Medium segment.
We expect the Brandy market to grow at 6-7% per annum in the coming few years.
Rum (~17% of IMFL volumes)
Rum is mostly consumed in South India and accounts for ~17% of the domestic IMFL
market. The market for Rum has been growing in mid single digits. The Regular segment
comprises 72% of the Rum market in India. Mohan Maekin leads the Rum segment,
with its Old Monk brand. The growth rates for this product segment have been
accelerating, as the younger population in other parts of the country has also started
preferring rum, on the perception of it being less harsh. Aggressive marketing by
foreign brands like Bacardi is also attracting up-market IMFL consumers to the Rum
fold at the premium end. We expect the market for Rum to grow at 8-9% per annum
for the coming few years. Though the Regular segment will continue to account for
bulk of Rum volumes, we expect the Premium segment to grow at high double digit
growth rates.
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Segmental split of Rum category
Category Rum Price Key Brands & Key Players
Mkt share Range segment Share Share
(%) (INR) (%) (%)
Premium 0.7 Above 420 Bacardi -73, Bacardi - 73,
Old Smuggler -16 Allied Dom 16Regular 72 300-420 Contessa-14, Old Monk -43, Mohan Meakin-43,
McDowell celebration -21 US -42, Radico- 15
Economy 25.7 200-250 Majestic - 21 UB-28
White 1.6 Gold Medal -23, Contessa - 16 US -23, Radico - 16
Source: Industry, Company, MOSL
Rising Rum consumption
Source: Industry, Company, MOSL
Vodka (~4% of IMFL volumes)
Vodka is the fastest growing segment of IMFL. It accounts for ~4% of the IMFL market
and has been growing at ~44% in the past few years. According to industry sources,
~8.8m cases of Vodka were sold in India during FY10. UNSP is the largest player in the
Vodka market, with 70% share in the Regular segment, with brands like Romanovand
White Mischief. Smirnoff continues to be the undisputed leader in the Premium
segment, which is 15% of the total Vodka market. Vodka has seen high growth rates
due to consumer preference for white alcoholic drinks and rising affluence. Vodka is
also emerging as a preferred drink for urban women.
RDCK has also entered the Vodka market, with its Magic Moments brand positioned
as the first triple distilled grain-based Vodka in the Indian market, at a premium to
Romanov. UNSP has plans to re-launch White Mischief Vodka in new packaging. In
addition, it is launching Mango and Chocolate Thrill flavors in Vodka. We expect the
Vodka market to grow by more than 30% per annum for the coming few years. High
growth in the product category would attract new players. As leading players try to
get market share and mind share in the small but high potential product category, the
Vodka segment will witness the launch of new variants, and various quality
improvement and consumer friendly initiatives.
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Segmental split of Vodka category
Category Vodka Price Key Brands & Key Players
Mkt share Range segment Share Share
(%) (INR) (%) (%)
Premium 15 1,400-1,800 Smirnoff-99 TDV -99
Regular 85 420-500 Romanov -39, White Mischief -31, US -70Magic Moments
Source: Industry, Company, MOSL
Vodka has outperformed other IMFL category
Source: Industry, Company, MOSL
Gin (~2% of IMFL volumes)
Gin accounts for 1.8% of the IMFL market and the product category has been more or
less stagnating, with expected growth of 0-1% per annum. UNSP has consolidated its
position in the Gin market, with 66% share in the Regular and 44% share in the Mediumsegment, with Blue Riband and Carew brands. The market has not seen any new
players or launches for quite some time and the product category lacks excitement.
We expect the trend to continue in the coming years with very little volume growth.
Segmental split of Gim category
Category Gin Price Key Brands & Key Players
Mkt share Range segment Share Share
(%) (INR) (%) (%)
Regular 56 360-475 Blue Riband- 66, Aristocrat - 11 US 66, JIL 11
Medium 44 250-350 Carew - 34, Marco polo - 19 US -44, Empee 19
Source: Industry, Company, MOSL
Gin category is yet to takeoff
Source: Industry, Company, MOSL
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High entry barriers to work in favor of existing players
Strong entry barriers characterize the Indian liquor industry. These have resulted in
very few new players having successfully entered and established new brands in the
market. The industry is dominated by few players like United Spirits (UNSP), PernodRicard, Radico Khaitan (RDCK), Jagatjit Industries (JGI) and Mohan Meakin (MOHN).
Media advertising of liquor is banned in India. Manufacturers undertake surrogate
advertising and sponsorships of various sports events to create brand awareness.
Surrogate advertising is generally done for soda, bottled water and sports
equipment. This makes it difficult for any player to launch a new brand and make
it a success. This has thwarted the attempts of many global majors to gain a strong
foothold in the Indian liquor industry.
Though one can readily expand existing units, it is difficult to obtain a fresh license
to set up a new unit. This acts as an entry barrier for any new global players.
Taxes and duties constitute more than 50% of the final consumer price. In addition
to excise, there are high taxes on inter-state movement of liquor. There are more
than 100 different types of taxes on liquor in India, which raises the entry barriers
for any new player.
Liquor is subject to 150% import duty and several state level duties, which raises
the price of imported liquor to very high levels. This results in very high prices for
imported liquor, thus limiting their consumer reach.
High taxes on inter-state movement of liquor results in manufacturers having
small bottling units in various states, thus creating inefficiencies in manufacturing.
Operating in India is akin to operating in 30 countries.
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Consumer | Alcoholic Beverages
Distribution system - gradually tilting in industry's favor
Liquor is a state subject in India. Consequently, the liquor industry is subjected to
very strict distribution controls by the state governments. There is pricing flexibility
in 32% of the market, while 57% of the market is controlled by government monopoliesand 11% by government sponsored cartels. Currently, three types of distribution
systems are prevalent in India - government controlled, auction market and free
market. Each distribution system has its own characteristics, some of which have
been impeding the growth